CHAMBER OF TAX CONSULTANTS Webinar on Taxation of Private Trusts/ family trusts, and Estate planning with the help of private trusts Taxability of Trust – Domestic and International Tax Issues Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants Email: ppshahandassociates@gmail.com 7th March 2018 P. P. Shah & Associates 1
Overview of Presentation Concept of Trust – Types & Purposes Application and uses of trust for Estate Planning Trust & Taxation: Onshore & Offshore Connecting factors and events for taxation (Domestic & International) Taxation of Onshore & Offshore Trust Taxation of Trust under ITA, 1961 Case Study – Onshore Trust Case Study – Offshore Trust under various scenarios Anti avoidance provisions Trust & Treaty Conclusion - Issues 7th March 2018 P. P. Shah & Associates 2
Concept of Trust Definition of Trust Trust is an equitable obligation binding a person to deal with property over which he has control for the benefits of the persons of whom he may himself be one and any one of whom may enforce the obligation. Briefly this led to the concept of “Equity’s interference with common law rights in pursuit of justice” As per Indian Trust Act, 1882; A Trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another & the owner. 7th March 2018 P. P. Shah & Associates 3
Purposes of Trust Evolution of Trust Use of Assets vs. Transfer of Assets Protection of Purposes Succession Planning Ownership succession Venture Capital Fund Private Equity Special Purposes Wealth Management Taxation Types of Trust is a consequence of above purposes 7th March 2018 P. P. Shah & Associates 4
Use of Trust for Estate Planning Advantages in Succession Planning and Asset Distribution through Trusts: Efficient mode of managing and passing the family assets as it helps create a legal framework for the family assets Bypasses the Probate process which is susceptible to frivolous claims and delays in court process safe-guards interests of family members including maintenance of members with special needs/disabilities Possible to attach conditions to gifts such as on attaining a particular age or fulfillment of the settlor’s wishes Avoids family disputes over the property 5 7th March 2018 P. P. Shah & Associates
Use of Trust for Estate Planning (con’t) Other Advantages of Trusts: Trust can serve as protection in case of a bankruptcy by protecting assets from creditor’s (actual and potential) claims, provided the assets have been transferred two years prior to the bankruptcy being declared Settlor can direct the managing and advisory committees, to monitor and advise the trustees on application and management of the trust assets there by enabling a relatively large pool of assets/ investments to be managed under one umbrella Trust can help exploiting offshore business opportunities, acquisition of interests and cross-border movement of family members 6 7th March 2018 P. P. Shah & Associates
Trust VS Will for Estate Planning Revocable Living Wills Trusts Name beneficiaries for property X X Leave property to young children X X Revise your document X X Avoid probate X Keep privacy after death X Requires a notary public X Requires transfer of property X Protection from court challenges X Avoid a conservatorship X Name guardians for children X Name property managers for children’s property X Name an executor X Instruct how taxes and debts should be paid X Simple to make X Requires witnesses X Reduce estate taxes - - 7 7th March 2018 P. P. Shah & Associates
Types of Trust Implied Express Constructive Resulting Executed Executory Revocable Irrevocable Discretionary Non . Discretionary 7th March 2018 P. P. Shah & Associates 8
Types of Trust Life Hybrid Bare Star Charitable Interest Fixed Employee Asset Accumulation Benefit Protection & Maintenance 7th March 2018 P. P. Shah & Associates 9
Trust, A Typical Structure Prescribes the objective of trust & its conditions, functions of Settlor/Grantor trustee, Protector/s & appoints beneficiary/ies Protector Trust Trustee/s controls the assets A guide to Trust Assets the Trustee Beneficiary/ies 7th March 2018 P. P. Shah & Associates 10
Trust, A Typical Structure Dual Ownership Legal Ownership decides control, management & possession Beneficial Ownership involves benefit, use & enjoyment of asset 7th March 2018 P. P. Shah & Associates 11
Taxation of Trust Onshore Trust Offshore Trust Selection as to type of trust is normally decided on the basis of purpose to which it is put and jurisdiction is decided on the basis of taxation and purposes Domestic Tax Laws International Tax issues 7th March 2018 P. P. Shah & Associates 12
Taxation of Trusts-Onshore & Offshore Onshore Trust Normally situated in tax neutral / High tax jurisdiction Settlor normally a non resident, can be resident also Normally Non resident beneficiary/ies and could be resident also Offshore Trust A word “offshore” indicates “off the shore”, outside the place. Normally a jurisdiction with low tax or no tax Formed by Non Resident settlor and Non resident beneficiary/ies 7th March 2018 P. P. Shah & Associates 13
Selection of Trust - Criterions General purpose or Special purpose Jurisdiction offering the ease to accomplish the General purpose or Special purpose may be surveyed for concluding the place of formation of the Trust Taxation Domestic Tax system/factors International Factors 7th March 2018 P. P. Shah & Associates 14
Basis of taxation - Domestic Tax System Generally under Domestic tax laws, basis could be one of the following Entity level taxation - Trust itself is taxed on its income and beneficiary is either exempt from taxation or credit of taxes are given to the beneficiary/ies Beneficiaries are only taxed, and trust is not taxed Beneficiaries pay taxes on the distributed amount and Trust pays on the undistributed amount of income 7th March 2018 P. P. Shah & Associates 15
Domestic Tax System Jurisdiction of Taxation for a trust Normally, where Trust is treated as “Resident” under the tax law of the State /system Residential Status Place of management/Administration Place where settlor is Resident Place where beneficiary/ies are Resident Location of the Assets 7th March 2018 P. P. Shah & Associates 16
Cross Border / International issues System of civil law or common law operating in the jurisdiction Pass through approach Who can be regarded as taxpayer, trustee or beneficiary, Article 3(1)(a) and Article 4(3) of the DTC Maximum tax rate for income of trust, particularly for Discretionary Trust Characterisation of distribution to beneficiaries and that of income of the trust Who can be regarded as beneficiary under article 10, 11, 12 and 23 of the DTC Who can be considered as alienator under article 13 of the DTC 7th March 2018 P. P. Shah & Associates 17
Cross Border Taxation of Trust S 1 T 1 B 1 S 2 T 2 B 2 S 3 T 3 B 3 In above chart S: Location of Assets T: Location of Trustee B: Location of Beneficiary No OECD guidance on the subject 7th March 2018 P. P. Shah & Associates 18
Attribution of income to a “Person” Person to whom income is attributed DTA benefits to Person who is taxpayer and Resident Income attribution – Different in Source State and Resident State: Trustee v/s Beneficiary. Trustee pays the tax Special rules in the DTA to incorporate conflict of attribution 7th March 2018 P. P. Shah & Associates 19
Australia- Papua New Guinea DTA A Resident of one of the Contracting States is beneficially or presently entitled directly or indirectly to a share of a business profits of an enterprise carried on in the other Contracting State by a trustee of a trust estate and Trustee has a PE under Article 5 in that other State, in such a case Resident beneficiary is deemed to be carrying on business in the Other State through the PE and its share of profits is attributed to that PE 7th March 2018 P. P. Shah & Associates 20
Trust under Income Tax Act, 1961 Public Charitable Trust Private Trust Trust vs AOP [(1960) 39ITR546 (SC) CIT vs Indira Balkrishna] followed consistently Relevant Provisions Section 2(15) Defines a charitable objective Section 10(23C) Provides exemption to educational, medical, charitable and public religious institutions, existing not for the purposes of profit Section 11-13 Provides for tax treatment in case of charitable trusts Section 60-63 Revocable Trust 7th March 2018 P. P. Shah & Associates 21
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